Wednesday, August 25, 2010

A glaringly obvious investment analogy...

Larry Hopeful was convinced he could make money betting on horse races. He had been compiling data and research on them for years. He knew that a horse was slightly more likely to win if Doug Handy had dressed its horseshoes. Jockeys in silk uniforms achieved slightly less wind resistance. If three brown horses won in a row, then it was statistically unlikely for a black horse to win in the next race. Random statistical knowledge of the last sort bothered Larry. Gay jockey's can only win on prime numbered days of the month. 'What could that possibly mean,' pondered Larry. It seemed like every gay jockey would lose money for Larry, even if it was a prime numbered day of the month.

After years of practice, Larry was able to boost his average chance-to-win-a-race to 50.3% Obviously the time and effort put into this endeavour was mostly wasted. Larry decided that, even though he enjoyed the process, he couldn't justify risking his hard earned cash. He continued to go to the races, but he would just watch. One day, as he wandered through the stalls behind the track, he noticed that all the horses except one were sick. Better yet, some of the horses had been withdrawn by the Federal Horse Commission due to legality issues. Even better, the one healthy, legal horse was slated to run on the dry side of the track. What an opportunity! Larry quickly rushed to the box office and put $1000 on the golden horse. The clerk informed Larry that, for a small fee, he could insure his bet against loses, so that there was now only an upside to the bet (minus the fee).

Larry won big that day. But for years after that he just hung around, compiling data until he could find that 'sure thing'. All that waiting might have been more boring than reckless betting, but at least now he had enough money to buy that sweet new analog-digital hybrid polysynth.

21 comments:

cyrusfx said...

There's no such thing as a "sure thing."

If there is only an upside to a bet, its not really a bet, now is it?

Mondu said...

I tried to exagerate the principles in my example so that they were obvoius.

'There's no such thing as a "sure thing." '

Of course not. The point is that rational investments give us some assurance that we we will make money. The more the better.

'If there is only an upside to a bet, its not really a bet, now is it?'

You miss the point.

Assume the following game. Bet $5. Win=recieve $10. Lose=receive $4.25. Worst case scenario, you lose $.75 (ie. the fee). Yes, there is some downside here, but its not a loss of $5.

cyrusfx said...

I've never bet $5 and lost more than $1.35, and that one time was a freak occurrence.

In your example, you could be winning the $10 only 10% of the time, which would mean you would be losing $1.75 every ten games. What special insight does having options give you in terms of figuring out the odds that a stock is likely to increase in value?

These days I put stop losses on my stocks to sell if they fall 5% or more, thus minimizing the damage.

It might be pure luck but I beat the market by about 2.5% today.

Mondu said...

'What special insight does having options give you in terms of figuring out the odds that a stock is likely to increase in value?'

None, they just minimize the downside. Insight into a stocks future value only comes from the deep knowledge I've been harping on.

'These days I put stop losses on my stocks to sell if they fall 5% or more, thus minimizing the damage. '

Possibly a good idea. But what if you need to hold on to those falling shares because you know something will cause an increase in price? My whole point is this: make decisions based on conceptual reasoning and knowledge of causes, not on surface patterns and movements in the data.

cyrusfx said...

"My whole point is this: make decisions based on conceptual reasoning and knowledge of causes, not on surface patterns and movements in the data."

Arguably that's what I'm currently attempting to do. I'm trying to catch stocks at the beginnings of uptrends; if my hypothesis is incorrect I cut my losses and move on.

I've found through personal experience that holding on to stocks just because you think they are going to come back up is a bad idea, as they often cross below support points(followed through with a selling off) and don't come back up for a long time, if ever.

You're not really offering specific advice in to how I should change my current system, just telling me that its wrong -- how specifically do you increase your chances of betting on the next sure thing?

Mondu said...

Argh. I'm done repeating myself and I don't want to make another glaringly obvious example. Hope it all works out for you.

cyrusfx said...

I learned about Risk Management in Month 1, so you don't have to do another glaringly obvious example.

Of course I am looking for the higher-probability bet, I'm not retarded.

But for every bet that exists there is someone on the other side and they don't want to lose their money either.

Ergo, lopsided trades are hard to come by, and you still didn't give me an actual example of a stock that demonstrates your hypothesis.

I don't understand how you think you're giving me a "reality check" without any sort of proof that you know what you're talking about.

Mondu said...

And what 'proof' do have that you know what you're talking about?

This reminds me of the halloween in IV when you got upset at me because I was trying to convince you not to sit on some municipal fixture on the street. I understood the very basic fact that 'cops dont want people to sit (loiter) on DP at night in IV'. You complained endlessly of my 'paranoia'. After a few minutes of discussion a cop asked you to get down from your perch. Maybe if I had 'proven' to you that I knew what I was talking about you would have gotten down sooner.

What I'm trying to get across in this discussion is very, basic, but all my points seem lost on you. The glaring example was not (directly) about risk management, it was about trends (the first part) and relevant factors (when larry goes behind the horse stalls). I gave several examples of relevant factors of this sort in another comment. I think my point is clear. But because I am not making specific, focused alterations to your given plan you don't seem receptive to my ideas.

I am not trying to give you random shit. If it seems like I'm fighting you its because I know something basic that I want you to know. Rather, I make primary in my conceptual scheme something that I would hope you would make primary.

I'm not an expert in these matters; im just giving you the best advice I can. My dad has been an investment manager for 50 or so years I like to think I have gleaned some wisdom from his experience. My conclusion: Investments are blind gambles unless a focused strategy is implemented. This strategy must reflect deep convictions about the market and its relevant factors. But we can only glean these factors through the type of fundamental analysis I've described repeatedly.

Without this deep conviction I personally could not put my own money on the line. I would never trust an algorithm because it worked in the past, it was developed by some double Phd, etc. I'm viciously skeptical of supposed regularities picked out by mathematical methods. If you want to find a pattern with a hot pattern finding device, you will have no problem doing so.

Most patterns/regularities need to be ignored. They are irrelevant. Once again, by parsing out the focused context in terms of relevant factors, we may be able to gain some insight capable of providing justification for our investments.

But how do we sort the relevant from the irrelevant factors? Not with an algorthim of course. It must be done freely, creatively, through the novel manipulation of concepts, by juxtaposing opposing or seemingly unrelated factors, etc.

cyrusfx said...

"After a few minutes of discussion a cop asked you to get down from your perch. Maybe if I had 'proven' to you that I knew what I was talking about you would have gotten down sooner."

I can't believe you think this is an acceptable analogy for our current discussion. In the analogy, there was no real negative consequence. I've already experienced the negative consequence of unfavorable trades many times, but its a learning experience, and I think its extremely naive of you to be so condescending to me when you can't point out one trade that you've made that demonstrates you know what you're talking about, or point to any tangible evidence that your principles are correct.

Saying because your Dad knows so doesn't help me. I'm a stickler for factual evidence.
Analogies and metaphors are nice but they are not guidelines for tangible application of knowledge to reality.

What I love about the market is that it is so pure -- it cuts out all ego, personality and pretention, and is straight data.

You didn't even bother to check the progress of my stock picks from a couple days back, because you are so assured that you are correct in whatever it is that you're saying, which you haven't managed to exemplify in reality yet.

Mondu said...

The IV example is apt. In both cases I've tried to enlighten you on some basic principles. Both times my point is lost.

'Saying because your Dad knows so doesn't help me. '

Not even close to what I said.

'What I love about the market is that it is so pure -- it cuts out all ego, personality and pretention, and is straight data.'

There is no such thing as 'straight data'. Thats my whole point.

cyrusfx said...

So maximizing gain and miminizing loss is good, thanks, I'll take that into consideration..

"There is no such thing as 'straight data'. Thats my whole point."

The stock market is just numbers and people responding to them. You could argue its vice-versa, but after 5 pm the stock market disappears; its dead because it exists solely as a conceptual agreement between men. Its just information.

The point I'm making is that any theory you have about the market, any bravado you put behind an idea is either validated or rejected by the market, no matter what you think should happen.

That's why I am requesting examples of stocks that have gone up in price due to the factors that you have mentioned coming in to play.

Of course its impossible to be accurate 100% of the time, but some people do consistently beat the market based on rationally sound and sensible methods. I'm using a combination of theories and approaches that make sense to me, and since I've begun to implement them I've done considerably well.

cyrusfx said...

Your winnings and losses are straight data. The movement of price is data, volume is data, trends are data, support and resistance lines are data -- if you don't think this stuff moves the brunt of the market, you're mistaken.

You haven't spent 100s of hours watching stock price movement, how it correlates with market movement, how news affects stocks, how politics affects stocks -- I'm taking all this stuff into consideration and you're basically telling me to throw it away for a set of principles that aren't based on anything I can visualize.

I wouldn't have minded your criticism if you didn't immediately start in with the negativity and condescension.

cyrusfx said...

And the IV example is most certainly not "apt."

You perceived the event of a cop talking to me as a "problem" when I did not. We have a fundamental discord in reality right there.

Since no actual negative consequence came of the situation, I would argue that I am right.

I would argue you have thrown yourself into a conviction rather blindly, since you seemingly have no actual investment or trading experience whatsoever.

Mondu said...

Fundamental analysis is fundamental. There is a substantial claim.


The nature of the system we are concerned with transcends quantification. There are non-mathematical aspects to the system that must be grasped in other ways. To think otherwise is to exhibit an unwarranted reductive bias. This is a substantial claim.

'The movement of price is data, volume is data, trends are data, support and resistance lines are data -- if you don't think this stuff moves the brunt of the market, you're mistaken.'

It doesn't. The underlying factors move the market. The data is data about the market. The market is not itself data. What 'moves the brunt of the market' is the reality behind the numbers; a world of CEO's, ideas, changing social norms, shifting resource availablities, changing trade regulations, changing infrastructure, changing culture, etc. The data does shed light on this structure, but only indirectly, incompletely and with reduced depth.

I can't provide solid examples to back my points up because any situation could be interpretted in light of this scheme. That's the problem with making such a basic point.

By calling my position vague and insubstantial you make yourself seem as though you're overlooking the obvious. I just don't know how to properly substantialize and elucidate the claim, 'food tastes good'. Its too obvious. Thats my problem here.

Mondu said...

OK you've shut down. I'm out. You can rant self righteously as long as you'd like now. I won't try to make any more sense of it.

cyrusfx said...

Kevin, you're not saying anything I don't already know.

"What 'moves the brunt of the market' is the reality behind the numbers; a world of CEO's, ideas, changing social norms, shifting resource availablities, changing trade regulations, changing infrastructure, changing culture, etc. The data does shed light on this structure, but only indirectly, incompletely and with reduced depth. "

A lot of this stuff is already built in to the stock price, and again its naive and narcissistic to think you have a leg up on the competition simply because you are capable of conceptualizing in abstract ways.

You're still not offering any alternatives for what I _should_ be doing.

The proof is in the putting.

Show me a mock portfolio where you incorporate your criteria into stock purchases, and then your weekly or monthly returns, and then I'll have some conviction.

cyrusfx said...

Yeah I've got a monopoly on self-righteousness here, whatever.

cyrusfx said...

that's convenient. accuse me of shutting down and run away without offering any sort of evidence that you know what you're talking about.

its not that I'm blind to your reasoning or logic, its that you haven't presented any real-world correlation with your ideas.

no theory has merit without a backing in physical reality.

marchhare14 said...

WOW YOU GUYS ARE FUCKING CRAZY!!! CAGE MATCH!!!

Huge Larry said...

It's indicative of the power of the dark side how rage has made Cy and Kevin powerful and prolific in their posting. We need more hate like this to fuel the fires of industry in preparation for the great burnination.

cyrusfx said...

I'm mad because I feel like Kevin is tearing down my 90%-completed puzzle and replacing it with his 30%-completed puzzle, all the while lecturing me about puzzle-building.

But yesterday I was striken with severe conjunctivitis so I really can't see anything clearly for a while.